Non-Interest Income and Total Income Stability

Bank of England Working Paper No. 198

Cass Business School Research Paper

40 Pages Posted: 15 Apr 2004

See all articles by Rosie Smith

Rosie Smith

Bank of England

Christos Staikouras

Athens University of Economics and Business - Department of Accounting and Finance

Geoffrey Wood

Cass Business School

Date Written: August 2003

Abstract

Banks can differ markedly in their sources of income. Some focus on business lending, some on household lending, and some on fee-earning activities. Increasingly, however, most banks are diversifying into fee-earning activities. Such diversification is either justified (by the bank) or welcomed (by commentators), or both, as reducing the bank's exposure to risk. Diversification across various sources of earnings is welcomed for, it is claimed, diversification reduces risk. Whether it does of course depends on how independent of each other the various earnings sources are. Traditionally fee income has been very stable; but, also traditionally, it has been a small part of the earnings stream of most banks. Has non-interest income remained stable, or at least uncorrelated with interest income, as banks have increased its importance in their earnings? This paper examines the variability of interest and non-interest income, and their correlation, for the banking systems of EU countries for the years 1994-98. It is found that the increased importance of non-interest income did, for most but not all categories of bank, stabilise profits in the European banking industry in those years. It is not, however, invariably more stable than interest income.

Keywords: European banking sector, non-interest income, profitability, statistical analysis

JEL Classification: G21

Suggested Citation

Smith, Rosie and Staikouras, Christos and Wood, Geoffrey E., Non-Interest Income and Total Income Stability (August 2003). Bank of England Working Paper No. 198; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=530687 or http://dx.doi.org/10.2139/ssrn.530687

Rosie Smith

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Christos Staikouras (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
Athens, 104 34
Greece
+30 210 8203 459 (Phone)

Geoffrey E. Wood

Cass Business School ( email )

London, EC2Y 8HB
Great Britain
+44 0 20 7040 8740 (Phone)
+44 0 20 7040 8881 (Fax)

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